First Quarter | 2023

Investing in government-related entities (GREs) is unavoidable in the Gulf. They are the largest and most liquid companies in the region, and a few of them dominate the major indices. Many of these GREs trade at a discount to comparable private-sector peers, and the easy reading is that the market is mispricing them. This Think Piece explains why the discounts can be deserved, using GRE banks as the case. The harder a bank's capital allocation is to predict, the harder it is to value, and acquisitive GRE banks are the hardest of all. Foreign acquisitions in countries with depreciating currencies generate translation losses that quietly erode capital while leaving reported earnings flattered. The same bank can show a range of return on equity calculations depending on the method used. It is important that investors evaluate acquisitive GRE banks cautiously, with a cheap-looking multiple often signaling justified concern rather than a bargain.